Compensating law firm managing partners?

Should managing partners be compensated for their service?  Answering this question seems easy enough. In reality, though,  the answer is much more complex. Even more difficult is determining how to fairly compensate deserving managing partners. A related challenge involves whether management committee members should be compensated for their contributions.

To answer these questions, it is helpful to consider the most common small-mid managing partner archetypes or scenarios. Consider if any of the following are relatable:

• No one else can do it as well as I can.
• I have the most business, so it is only natural that I have the most influence.
• For one reason or another, most of the management tasks fall to me, so I might as well have the title.
• I would rather practice law, but my partners want me to run the firm.
• My partners want me to manage the firm, and I like doing it.
• My partners appreciate my management talent, but not to the detriment of my practice.
• Managing partners are elected and serve for a term.
• I don’t want to practice law; I like to manage.

Choosing a managing partner in a small-mid firm is typically about risk (skin in the game), commitment, ability to lead, managerial competence, track record, and client control.  As firms get larger, however, the power structure is usually more diffuse, and electing a managing partner is a political process or becomes more committee-oriented.

Objective Systems

Paying a managing partner also depends on a firm’s compensation system. Objective systems that rely heavily on timekeeper and origination performance measures will need a feature that allocates compensation for non-client-related contributions. 

Subjective Systems

Subjective and equity ownership-based compensation systems tend to use a rough justice approach to rewarding managing partner service. For example, if a managing partner also owns the most equity in the firm, the implied bargain, although not always true,  is that he or she benefits the most from their efforts and no additional compensation is necessary. In most cases, ownership points are not taken from a managing partner while in that role, so it is arguable that they are indemnified from the short-term negative impacts of their service.   

Firms that use base salaries as part of their compensation scheme tend to consider managing partner service when setting the base. Finally, many firms do not compensate managing partners and view it as either a duty, a coveted position, or simply don’t consider management contributions in their compensation formula. 

In our view, it is fair to compensate managing partners for their contributions that benefit all partners and for managing partners to hold themselves accountable for delivering results.

Measuring Managing Partner Performance

Objectives Measures

Managing partners don’t typically enjoy the level of power afforded to a CEO in a corporation.  For the most part, managing partners derive their power from the size of their client base and or, as a client of ours likes to point out,  “by consent of the governed”. Law firm managing partners have a different type of accountability. The burden law firm managing partners carry is often underappreciated and undervalued. 

Authority and accountability will vary with a firm’s management approach, but the areas of responsibility of a typical managing partner may include the following: 

• Accounting and Taxes
• Banking and Finance
• Marketing 
• Human Resources
• Technology
• Facilities and Office Services
• Major Purchase Management
• Special Projects
• Attorney Performance
• Partner Issues
• Legal Compliance and Risk Management
• Client Service
• Cost Control and Profitability
• Partners Compensation
• Recruiting and Lateral Hiring
• Strategic Planning
• Branch Office Management and Development

How much a managing partner must manage often depends on the administrative structure of the firm. If the firm has a strong non-lawyer management team, participation by other partners, and outside support systems, the managing partner’s position is easier. It is also worth noting most managing partners also practice law and manage client relationships. 

To help evaluate the contribution level of a managing partner, here is a link to a helpful template from our knowledge base and resource page. Here is a snapshot of our editable template that you can download for free.  

Typical Compensation Plans

Fully compensating managing partners is harder for small and mid-sized firms that often rely on the managing partner’s economic contributions to sustain profitability. Which should come first?: Improved performance followed by incentives? Or incentives first to create improved performance? This question is a common stumbling block for many firms. 

Making this decision and designing a compensation plan that fairly compensates firm management and leadership is best accomplished using a structured process. 

To help your firm get started, here are a few suggested approaches that can help.  

A good managing partner can make a big difference in the success of the firm, but a system that creates accountability and rewards performance can make an even greater impact. Unlocking the potential of a law firm and creating opportunities for talented hardworking lawyers and staff often comes down to making a few important decisions correctly.  A talented managing partner who has the technical and administrative support to do the job correctly not only ensures the long-term stability of the firm but can also unlock a firm’s full potential.